The following narrative presents management's discussion and analysis of the Company and its subsidiaries' financial condition and results of operations as of and for the three-month and nine-month periods ended September 30, 2008 and 2007. The historical financial statements of the Company are set forth elsewhere herein. This discussion should be read in conjunction with those financial statements and the other financial information included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Forward-looking statements are generally identifiable by the use of forward-looking terminology such as "anticipate," "assume," "believe," "continue," "could," "would," "endeavor," "estimate," "expect," "forecast," "goal," "intend," "may," "objective," "plan," "potential," "predict," "project," "seek," "should," "target," "will" and other similar words and expressions of future intent.

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could cause actual results and performance to differ from those expressed in our forward-looking statements we make or incorporate by reference in this Quarterly Report on Form 10-Q include, but are not limited to:

• the effects of the current global economic crisis, including, without limitation, the recent and dramatic deterioration of real estate values, the subprime mortgage, credit and liquidity markets, as well as the Federal Reserve's actions with respect to interest rates, may lead to a further deterioration in credit quality, thereby requiring increases in our provision for loan losses, or a reduced demand for credit, which would reduce earning assets;

• the U.S. government's proposed plan to purchase large amounts of illiquid mortgage-backed and other securities from financial institutions may not have the desired impact on the financial markets;

• possible changes in trade, monetary and fiscal policies, as well as legislative and regulatory changes, including changes in accounting standards and banking, securities and tax laws and regulations and governmental intervention in the U.S. financial system, as well as changes affecting financial institutions' ability to lend and otherwise do business with consumers;

• the imposition of enforcement orders, capital directives or other enforcement actions by our regulators;

• our ability to effectively manage interest rate risk and other market risk, credit risk and operational risk;

• adverse changes in the status or financial condition of the Government Sponsored Enterprises (the GSEs) impacting the GSEs' guarantees or ability to pay or issue debt;

• changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact interest margins and may impact prepayments on the mortgage-backed securities portfolio;

• possible changes in the quality or composition of our loans or investment portfolios, including further adverse developments in the real estate markets, the borrowers' industries or in the repayment ability of individual borrowers or issuers;

• increases in our nonperforming assets, or our inability to recover or absorb losses created by such nonperforming assets;

• our ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support our business;

• the failure of our assumptions underlying the establishment of allowances for loan losses and other estimates, or dramatic changes in those underlying assumptions or judgments in future periods, that, in either case, render the allowance for loan losses inadequate or require that further provisions for loan losses be made;

• unexpected outcomes of existing or new litigation;

• our ability to keep pace with technological changes;

• our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers and potential customers;

• the risks of merger, acquisitions and divestitures, including with out limitation, the costs of integrating our operations, potential customer loss and deposit attrition and the failure to achieve expected gains, revenue growth and expense savings from such a transaction;

• management's ability to develop and execute plans to effectively respond to unexpected changes; and

• other factors and information contained in this Quarterly Report on Form 10-Q and other reports that we file with the Securities and Exchange Commission (SEC) under the Exchange Act.

The cautionary statements in this Quarterly Report on Form 10-Q also identify important factors and possible events that involve risk and uncertainties that could cause our actual results to differ materially from those contained in the forward-looking statements. We do not intend, and undertake no obligation, to update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of differences in actual results, changes in assumptions or changes in other factors affecting such statements, except as required by law.

Readers should carefully review all disclosures we file from time to time with the SEC.

Unless indicated otherwise, references in this Quarterly Report on Form 10-Q to "we," "us," "our," "SBKC" or the "Company" refer to Security Bank Corporation and its consolidated subsidiaries, Security Interim Holding Company, Security Bank of Bibb County, Security Bank of Houston County, Security Bank of Jones County, Security Bank of North Metro, Security Bank of North Fulton and Security Bank of Gwinnett County. Together, the consolidated subsidiary banks are referred to as "the Banks."

Overview

Security Bank Corporation was incorporated on February 10, 1994 for the purpose of becoming a bank holding company. We are subject to extensive federal and state banking laws and regulations, including the Bank Holding Company Act of 1956, as amended, and the bank holding company laws of Georgia. We own six subsidiary banks-Security Bank of Bibb County, Security Bank of Houston County, Security Bank of Jones County, Security Bank of North Metro, Security Bank of North Fulton and Security Bank of Gwinnett County. We also own Security Real Estate Services, Inc. (SRES, Inc.) (formerly Fairfield Financial Services, Inc.), an interim real estate and development lender and traditional mortgage originator, which functions as an operating subsidiary of Security Bank of Bibb County. Effective July 15, 2008, we changed the name of Fairfield Financial Services, Inc. to Security Real Estate Services, Inc. The Banks are also subject to various federal and state banking laws and regulations. During the quarter ended March 31, 2008, we sold CFS Wealth Management, LLC back to its original owner. The entity's assets and results of operations were not material to the Company's consolidated financial statements. SBKC Interim, a wholly owned subsidiary of Security Bank Corporation, was formed in April 2008 for the purpose of issuing $40.0 million of subordinated notes.

The Banks each operate as a separate legal entity under the corporate umbrella of Security Bank Corporation. As a result, each Bank has its own board of directors and management comprised of persons known in the local community in which each Bank operates. We provide significant assistance and oversight to the Banks in areas such as budgeting, marketing, human resource management, credit administration, operations and funding. This allows us to maintain efficient, centralized reporting and policies while maintaining local decision-making capabilities.

As of September 30, 2008, we had 448 employees on a full-time equivalent basis.

Like most financial institutions, our profitability depends largely upon net interest income, which is the difference between the interest received on earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Our results of operations are also affected by our provision for loan losses; noninterest expenses, such as salaries, employee benefits and occupancy expenses; and noninterest income, such as mortgage loan fees and service charges on deposit accounts.

During the first quarter of 2008, we implemented a capital plan to enhance and strengthen the levels of capital at the Company such that we could maintain the resources needed to maintain "well capitalized" levels of regulatory capital at each of the Banks. We believed such a plan was necessary in light of the continuing and substantial deterioration of the residential real estate markets nationally and in our local markets. This continued deterioration has resulted in increasingly higher levels of nonperforming assets, higher provisions for loan losses and associated expenses.

Our capital plan includes the following steps:

Rights Offering

On February 11, 2008, we distributed non-transferable rights to subscribe for and purchase up to 5,319,148 shares of our common stock to our then-current shareholders. In the offering, each shareholder received a right to purchase 0.28121 shares of common stock, at a subscription price of $6.58 per share, for each share owned on the record date. Shareholders who exercised their full basic subscription right were also able to exercise an oversubscription right enabling such shareholder to purchase shares remaining after the exercise of all other shareholders' basic subscription rights. In conjunction with the rights offering, we entered into a standby purchase agreement with two shareholders, one of whom is a director of the holding company and one of whom is a director of a subsidiary bank, pursuant to which these shareholders agreed to purchase up to $18 million of common stock remaining after the exercise of shareholders' basic and oversubscription rights. This aggregate amount included all of the shares purchasable by these two individuals in connection with their basic subscription privileges along with their standby commitment. The offering closed on March 10, 2008, and we raised approximately $28.1 million.

Subordinated Notes

On April 28, 2008, we entered into a Subordinated Note and Securities Purchase Agreement by and among the Company, SBKC Interim, and private equity funds managed by FSI Group, LLC (the Purchasers), pursuant to which we sold $40 million of subordinated notes (the Notes). The Notes were sold to the Purchasers in a private offering, bear an interest rate of 9.5%, are callable after five years at a premium and mature in 2018. The subordinated debt has been structured to qualify as Tier 2 regulatory capital on a consolidated basis.

In connection with the issuance and sale of the Notes by SBKC Interim, the Company issued to the Purchasers immediately exercisable warrants to purchase 2,552,717 shares of the Company's voting common stock at an exercise price of $6.58 per share, subject to certain adjustments (the voting warrants). The Company also issued to the Purchasers 3,526,310 stock appreciation rights (SARs) that entitle the holders, upon exercise, to receive a cash payment from the Company in an amount equal to the number of SARs outstanding multiplied by the excess of the Company's common stock price above the exercise price of $6.58 per share, subject to certain adjustments. On June 26, 2008, at a Special Shareholders' Meeting, our shareholders approved two proposals: (1) an amendment to the Amended and Restated Articles of Incorporation authorizing nonvoting common stock and (2) the exchange of the SARs on a one-for-one basis for nonvoting warrants, which are exercisable for nonvoting common stock. On June 27, 2008, we completed the exchange of the SARs for the nonvoting warrants, which may be exercised at a price of $5.92 per share, subject to certain adjustments, to purchase 3,526,310 shares of nonvoting common stock. In addition, the nonvoting common stock is convertible into shares of voting common stock under certain limited circumstances.

We used a portion of the proceeds from the Notes to pay off and terminate the holding company lines of credit. We have and will continue to use the remainder of the proceeds for general corporate purposes, which will include infusing additional capital in our Banks so that they will maintain "well capitalized" levels of regulatory capital.

The Purchasers have been granted certain registration rights with respect to any common stock of the Company issued or issuable to the Purchasers in respect of their holdings of voting warrants, nonvoting warrants or nonvoting common stock, which is set forth in a Registration Agreement between the Company and the Purchasers.

Other Steps

During the first quarter of 2008 we also completed cost saving steps aimed at achieving a targeted reduction of noninterest expenses of $3.0 million for 2008. Finally, we suspended our quarterly cash dividend and all Board of Directors' fees during the third quarter of 2008. We also restructured our investment portfolio to include more securities of a lower risk weighting by selling certain securities with higher risk weightings.

Third Quarter Update

During the third quarter of 2008, the economic crisis that had been confined to residential real estate and subprime lending evolved into a global economic crisis that negatively impacted not only liquidity and credit quality but also economic indicators such as the labor market, volatile equity markets and declining home values. The capital and credit markets experienced extreme volatility and disruption at unprecedented levels as economic fears and illiquidity persisted. The markets have exerted downward pressure on stock prices and credit capacity for certain issuers. Additionally, certain financial institutions failed or merged with other institutions and FNMA and FHLMC entered into conservatorship with the U.S. government. During September the federal government relied on nearly every legal authority available to address the unfolding crisis, including direct and indirect financial assistance, government takeovers and the bankruptcy process.

In October, the Congress passed and the President signed into law the Emergency Economic Stabilization Act of 2008 (the EESA). The EESA provides up to $700 billion of relief for financial institutions holding troubled residential and commercial mortgage loans and other assets. The major components of the EESA include:

• Troubled Asset Relief Program (TARP). Under the TARP, the Treasury Department may purchase and hold up to $700 billion in troubled assets which are defined as residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008 and that the Secretary determines promotes financial market stability.

• Capital Purchase Program (CPP). The CPP allocates up to $250 billion of the $700 billion under TARP that Treasury may use to inject capital into qualifying financial institutions via acquiring senior preferred stock in the institutions. The senior preferred stock would be perpetual, receive cumulative dividends of 5% for the first five years and 9% thereafter, be callable at par after three years and come with warrants for common equity equal to 15% of the amount of the preferred stock. The Federal Reserve Board has adopted an interim rule that allows bank holding companies to include in capital without restriction the senior preferred stock issued to the Treasury in Tier 1 capital.

• Program for Systemically Significant Failing Institutions. This program will potentially provide direct assistance to certain failing firms on terms negotiated on a case-by-case basis.

Under each of these plans, the qualifying institutions must agree to certain compensation and governance guidelines applicable to the Chief Executive Officer, Chief Financial Officer and the next three highest paid officers of the institution. The compensation guidelines include these provisions: incentive compensation plans should not include provisions that would encourage reckless or high risk activities in order to qualify for the incentive compensation; a clawback provision that bonuses or other incentive compensation received based on financial results that are later found to be inaccurate would be returned to the institution; executive compensation in excess of $500,000 per executive officer may not be deducted for income tax purposes; and a prohibition against making a golden parachute payment based on the Internal Revenue Code provision.

Presently, we cannot determine whether these steps undertaken by the federal government will be successful or not. Nor can we determine the full effects of these steps on the Company; however, we are currently reviewing these programs to determine in which, if any, the Company will participate.

Financial Condition

At September 30, 2008, our total assets were $2.89 billion compared to $2.83 billion at December 31, 2007. The increase in total assets compared to December 31, 2007 is primarily due to increases in cash and cash equivalents, investment securities, other real estate and other assets, offset by decreases in loans receivable and goodwill.

Assets

The composition of our assets is as follows:



                                              September 30,     December 31,
(In Thousands)                                    2008              2007         $ Change      % Change
Cash and Due From Banks                      $       283,238   $       91,644   $  191,594        209.1 %
Federal Funds Sold                                    13,369            6,612        6,757        102.2 %
Interest-Bearing Deposits With Other Banks             1,187            7,015       (5,828 )      -83.1 %
Investment Securities                                333,223          297,156       36,067         12.1 %
Federal Home Loan Bank Stock                          13,797            8,243        5,554         67.4 %
Loans Held For Sale                                    4,780            7,605       (2,825 )      -37.1 %
Loans Receivable, Net                              1,989,667        2,150,615     (160,948 )       -7.5 %
Premises and Equipment                                38,561           43,171       (4,610 )      -10.7 %
Long-Lived Assets Held For Sale                        4,808               -         4,808        100.0 %
Other Real Estate                                     83,362           28,175       55,187        195.9 %
Goodwill                                              18,373          128,571     (110,198 )      -85.7 %

Core Deposit Intangible, net                           3,444            4,125         (681 )      -16.5 %
Accrued Interest Receivable                           15,193           24,254       (9,061 )      -37.4 %
Other Assets                                          85,351           35,885       49,466        137.8 %

                                             $     2,888,353   $    2,833,071   $   55,282          2.0 %

Cash and Cash Equivalents

The increase of $198.4 million is due primarily to the sale of other real estate, increased borrowings from the Federal Home Loan Bank and the issuance of notes payable in an effort to bolster on-balance sheet liquidity in response to current economic conditions. See the Condensed Consolidated Statement of Cash Flows for a detail of the sources and uses of cash and cash equivalents during the nine months ended September 30, 2008 and 2007.

Investment Securities

The composition of the investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits.

During the nine-month period ended September 30, 2008, the Company sold certain U.S. Government sponsored mortgage-backed securities and reinvested the proceeds into securities with lower risk-weightings in order to make the portfolio more capital efficient. Compared to December 31, 2007, investment securities increased $36.1 million or 12.1%. At September 30, 2008 and December 31, 2007, the securities portfolio accounted for approximately 11.5% and 10.5%, respectively, of total assets.

The investment securities portfolio primarily consists of U.S. Government sponsored collateralized mortgage obligation bonds, agency mortgage-backed securities and municipal securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. Substantially all of our mortgage-backed and collateralized mortgage obligation bonds are Government National Mortgage Association issued, and we do not have any bonds secured by subprime mortgages. The actual maturities of these securities will differ from the contractual maturities because loans underlying the securities may prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, we may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow down and the weighted average life extends. This is referred to as extension risk which can

lead to lower levels of liquidity due to the delay of timing of cash receipts and can result in the holding of a below market yielding asset for a longer time period.

Loans Receivable, Net

Loans receivable, net decreased approximately $160.9 million from December 31, 2007 as a result of $70.2 million in charge-offs and $83.6 million in foreclosures. Additionally, due to the fact that adverse market conditions have restrained the pace of new real estate project financing, we have significantly slowed the origination of new loans when compared with previous periods. Furthermore, during the third quarter of 2008, loans of $30 million were sold in connection with the sale of a loan production office of Security Bank of Bibb County in Bogart, GA.

Risk Elements and Allowance for Loan Losses (ALL)

Nonperforming assets consist of nonaccrual loans, loans 90 days past due and accruing and other real estate, which is real estate acquired through foreclosure. As a result of continued deteriorating conditions primarily in the residential real estate and development market, nonperforming assets increased to $283.3 million or 9.8% of total assets at September 30, 2008, compared to 8.7%, 7.9% and 2.8% of total assets at June 30, 2008, March 31, 2008 and December 31, 2007, respectively.

The following table presents our nonperforming assets as of the dates indicated:

                                         September 30,      June 30,      March 31,       December 31,
(In Thousands)                               2008             2008           2008             2007
Nonaccrual Loans                        $       199,907     $ 186,139     $  186,520     $       50,635
Loans 90 Days Past Due and Accruing                  -             -              68                242
Other Real Estate                                83,362        62,814         35,749             28,175

Total Nonperforming Assets              $       283,269     $ 248,953     $  222,337     $       79,052

The increase in nonperforming assets is primarily attributable to the significant slowdown in residential real estate sales that began in late summer of 2007 and has continued through the third quarter of 2008. A significant portion of the loan portfolios of our metropolitan Atlanta banks and SRES, Inc. is concentrated in loans to residential builders and developers. With the significant slowing of home and land sales, the prices of homes and land have declined. Therefore, many of our customers who develop and sell residential real estate cannot service their loans because they are not generating any revenue.

Nonaccrual loans increased sequentially by $13.8 million during the quarter ended September 30, 2008. There was significant movement within these loans during the period as $14.4 million of nonaccrual loans were charged-off, $30.9 million went into foreclosure, $66.9 million of loans went on nonaccrual status and $7.8 million was collected or upgraded to accrual status. At September 30, 2008, the 10 largest nonaccrual loans comprised $99.1 million or 50% of the total and all were collateralized by residential real estate.

Other real estate increased sequentially by $20.5 million during the quarter ended September 30, 2008, as we foreclosed on $30.9 million of real estate, sold $8.1 million of real estate and recorded provision for losses of $2.9 million. Of the total balance of $83.4 million of other real estate at September 30, 2008, the largest component is residential lots at 41%, followed by single family homes at 33%, raw land at 25% and commercial property at 1%.

Our management assesses the adequacy of the ALL quarterly. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ALL consists of two components:
(1) a specific amount representative of identified credit exposures that are readily predictable by the current performance of the borrower and underlying collateral (SFAS No. 114 component); and (2) a general amount based upon historical losses that is then adjusted for various stress factors representative of various economic factors and characteristics of the loan portfolio (SFAS No. 5 component). Even though the ALL is composed of two components, the entire ALL is available to absorb any credit losses.

We establish the specific amount by examining impaired loans. Under generally accepted accounting principles, we may measure the loss either by (1) the observable market price of the loan; or (2) the present value of expected future cash flows discounted at the loan's effective interest rate; or (3) the fair value of the collateral if the loan is collateral dependent. Because the majority of our impaired loans are collateral dependent, nearly all of our . . .